Daily Archives: April 14, 2011
Obama’s Soak-the-Rich Tax Hikes Won’t Work
by Alan Reynolds
This article appeared in The Wall Street Journal on April 14, 2011.
President Obama’s response to congressional efforts to curb runaway federal spending is to emphasize, once again, his resolve to greatly increase tax rates on married couples whose joint incomes are above $250,000. This insistent desire to raise taxes — which he repeated in a speech yesterday while complaining about “trillions of dollars in … tax cuts that went to every millionaire and billionaire in the country” — is a distraction. It won’t solve our nation’s fiscal problem.
Preliminary estimates from the Congressional Budget Office (CBO) project that federal spending under the president’s 2012 budget plan would average 23.3% over the coming decade — up from 19.7% in 2007 and 18.2% in 2001.
Even if the president could persuade Congress to enact all of his proposed tax increases, in addition to surtaxes already included in ObamaCare, the CBO finds we would still face endless budget deficits averaging 4.8% of GDP.
“Federal debt held by the public would double under the President’s budget,” says the CBO, “growing from $10.4 trillion (69% of GDP) at the end of 2011 to $20.8 trillion (87% of GDP) at the end of 2021, adding $9.5 trillion to the nation’s debt from 2012 to 2021.”
The trendy talking point of blaming projected deficits on “tax cuts for the rich” is flatly absurd.
And yet, enormous as they are, these deficit and debt estimates assume that the higher tax rates called for under the president’s 2012 budget plan do no harm to the economy, that interest rates stay unusually low, and that the economy avoids recession for a dozen years. Those assumptions require taxpayers to behave much differently than they ever have before.
The revenue estimates are even more unbelievable. According to the Office of Management and Budget, total revenues would supposedly exceed 19% of GDP after 2015, rising to 20% by 2021 — a level briefly reached only at the height of World War II (1944-45) and the pinnacle of the tech-stock boom (2000). Moreover, these unprecedented revenues would supposedly come from the individual income tax, which is even less plausible.
It is not as though we have never tried high tax rates before. From 1951 to 1963, the lowest tax rate was 20% to 22% and the highest was 91% to 92%. The top capital gains tax rate approached 40% in 1976-77. Aside from cyclical swings, however, the ratio of individual income tax receipts to GDP has always remained about 8% of GDP.
The individual income tax brought in 7.8% of GDP from 1952 to 1979 when the top tax rate ranged from 70% to 92%, 8% of GDP from 1993 to 1996 when the top tax rate was 39.6%, and 8.1% from 1988 to 1990 when the highest individual income tax rate was 28%. Mr. Obama’s hope that raising only the highest tax rates could keep individual tax receipts well above 9% of GDP has been repeatedly tested for more than six decades. It has always failed.
Federal revenue from the individual income tax exceeded 9% of GDP only eight times in U.S. history — during World War II (9.4% in 1944), the recessions of 1969-70, 1981-82 and 1991-92, and the tech-stock boom-bust of 1998-2001. Revenues were a high share of GDP during the three recessions because GDP fell.
The situation of 1997-2000 was unique. Individual income tax revenues reached an unprecedented 9.6% of GDP from 1997 to 2000 for reasons quite unlikely to be repeated. An astonishing quintupling of Nasdaq stock prices coincided with an extraordinary proliferation of stock options, which the Federal Reserve’s Survey of Consumer Finances found were granted to 11% of U.S. families by 2001, and with a reduction in the capital gains tax to 20% from 28%, which encouraged much greater realization of taxable gains through stock sales. Revenues from the capital gains tax rose to 10.8% of all individual income tax receipts in 1997 and 13% by 2000. The unexpected revenue windfalls in President Bill Clinton’s second term were largely a consequence of lower tax rates on capital gains.
Using IRS data, Thomas Piketty of the Paris School of Economics and Emmanuel Saez of the University of California at Berkeley have estimated that realized capital gains accounted for just 13%-22% of reported income among the top 1% of taxpayers from 1988 to 2006, when gains were taxed at 28% — but that fraction swiftly reached 29%-32% in 1998-2000, when the capital gains tax fell to 20%.
The average tax rate of such top taxpayers was mechanically diluted by the greatly increased realizations of capital gains after 1997 and 2003, since a larger share of reported income consisted of capital gains. Yet the amount of taxes paid by top taxpayers reached record highs for the same reason — there was more revenue to be had from taxing many gains at a low rate than from taxing fewer gains a high rate. Nobody can be forced to sell assets in taxable accounts. To complain that a low tax on realized capital gains is “unfair” is to suggest it would be fairer for affluent investors to sit on unrealized gains, as though an unpaid tax is morally superior to one that collects billions.
As a result of the conventional confusion between tax rates and revenues, some stories in the media have abetted the delusion that the huge gap between spending and likely revenues could be narrowed by simply increasing the highest tax rates on capital gains and/or dividends.
A recent cover story in Bloomberg Businessweek by Jesse Drucker, “The More You Make, the Less You Pay,” reported that, “For the well-off, this could be the best tax day since the early 1930s… . For the 400 U.S. taxpayers with the highest adjusted gross income, the effective federal income tax rate — what they actually pay — fell from almost 30% in 1995 to just under 17% in 2007, according to the IRS.”
Among the top 400 taxpayers (rarely the same people from one year to the next), the average tax rate fell to 22.3% in 2000, when the capital gains tax was 20%, from 29.9% in 1995 when the capital gains tax was 28%. But that same IRS report also shows that real tax revenues from the top 400 more than doubled after the capital gains tax fell, rising to $11.8 billion in 2000 from $5.2 billion in 1995, measured in 1990 dollars.
The same thing happened after 2003, when the capital gains tax was further reduced to 15%. The average tax rate of the top 400 fell to 16.6% in 2007 from 22.9% in 2002. Even though there was no stock market boom as in 1997-2000, real revenues of the top 400 nevertheless doubled again — to $14.5 billion in 2007 from $6.9 billion in 2002. Instead of paying less when the capital gains tax rate went down in 1997 and 2003, the top 400 instead paid much, much more.
The trendy talking point of blaming projected deficits on “tax cuts for the rich” is flatly absurd.
Both individual income taxes and overall federal taxes have long been a surprisingly constant percentage of GDP — 8% and 18%, respectively — regardless of top tax rates on salaries, small business and investors. It follows that the only reliable way to raise real federal revenues over time is to raise real GDP.
( Original Article )
Tax and Debt Bomb
By: Larry Kudlow
We thought tax reform meant lowering rates and broadening the base by eliminating or cutting back on various deductions, credits, and loopholes. That’s what the Bowles-Simpson commission proposed. That’s what Paul Ryan and David Camp are working on. And that’s the pro-growth model.
But President Obama unveiled a much different tax-reform vision in his much-anticipated debt speech on Wednesday. He would raise tax rates on upper-income earners and small businesses. He also would eliminate deductions and credits, or so called “tax expenditures.” The president referred to these tax-expenditure reductions as “spending cuts.” In his context, they most certainly are not. They are more tax hikes.
Basically, the president is giving successful earners and small-business filers a double tax hike. That’s what it really is.
Of course, the president’s formula of estimating higher revenues to lower the deficit is completely wrong. The reality is that higher tax rates will slow the economy, inhibit new start-up companies, penalize investors, and may very well lose revenues and increase the deficit.
In the latter part of his speech the president did mention some kind of middle-class and corporate tax reform. But he gave no specifics.
He also touted $750 billion in discretionary spending cuts, but again without any details. Most of that amount probably comes from the recent continuing resolution to avoid a budget shutdown. Since Obama is extrapolating out twelve years, who knows how this is scored.
On the entitlement front, Obama rejected Paul Ryan’s consumer-choice and competition approach to Medicare reform. Instead, he invoked the Obamacare central-planning agency called the Independent Payment Advisory Board, which is supposed to make reductions in Medicare. Medicare itself would exercise more price controls on prescription drugs, rolling back the consumer choice and competition established under George W. Bush.
In total, President Obama is claiming $4 trillion in deficit reduction over twelve years. But we’ll never see it. Interest expense savings is supposed to make up $1 trillion of that amount, while the rest will somehow come from a concoction of fewer tax deductions, higher tax rates, and $400 billion in defense-spending cuts.
In effect, the president has moved to the left. He has embraced the Democrats’ so called progressive caucus in the House by slashing defense and jacking up taxes, all while offering no serious entitlement reform. (Hat tip to Jimmy Pethokoukis for nailing this earlier in the week.)
My final point is this: President Obama’s harsh-rhetoric rejection of the Ryan budget and his new (presidential) campaign to raise taxes on the rich sets up a huge confrontation with House Republicans on the eve of the hugely important debt-limit expiration.
Sometime in mid to late May, the debt ceiling to allow the government to borrow more money is going to run out. The Treasury can move money inside government accounts to forestall a debt breakdown for another couple of months. But the potential for a major political conflict on the eve of this process sets up the worst possible outcome: Failure of the U.S. to pay the interest on its own debt.
This is unnerving to financial markets. Instead of compromise, the president decided to seek confrontation.
Caveat emptor. Investors beware.
( Original Article )
Republicans push bills to boost offshore oil drilling
By Tom Doggett
WASHINGTON | Thu Apr 14, 2011 8:58am EDT
(Reuters) – Republican lawmakers in the House of Representatives on Wednesday pushed a trio of bills through a congressional committee that would boost offshore oil drilling and ease some regulations on oil companies.
Republicans said the bills would reverse the Obama administration energy policy of the last two years that they claimed has reduced domestic oil production and made the United States more reliant on foreign suppliers and vulnerable to oil price spikes.
“Congress must take action to increase energy production,” said Representative Doc Hastings, who chairs the House Natural Resources Committee that approved the three bills.
The legislative action comes as oil and gasoline prices are soaring and the Energy Department forecasts U.S. oil production in the Gulf of Mexico will decline by 190,000 barrels per day this year and in 2012.
Democrats countered that with the one-year anniversary of the BP oil spill next week, now is not the time for Congress to open new areas to drilling and weaken offshore safety regulations.
“This legislative package reflects a pre-spill mentality of speed-over-safety,” said Representative Edward Markey. “It would open up huge swaths of our coasts to drilling, without first applying any new safety standards learned from the BP disaster.”
The legislation is likely to clear the full House of Representatives next month, but it probably will not find enough support in the U.S. Senate to pass. The White House would likely threaten a veto on the legislation as well.
The three bills would require the Interior Department to lease tracts in the Gulf of Mexico and off the Virginia coast, new areas the Obama administration delayed from development after the BP oil spill.
Leasing could also occur off most of the U.S. Atlantic Coast and the West Coast.
The department would have 60 days to review and decide whether an oil company’s new drilling permit should be approved. Permits that were cleared before the White House imposed a drilling moratorium after the oil spill would be restarted within 30 days.
The legislation also commits the Obama administration to higher domestic oil and gas production, requiring the White House to boost offshore oil production to 3 million barrels a day and natural gas output at 10 billion cubic feet each day in the government’s upcoming 2012-2017 offshore drilling plan.
Those production goals would have to be met by 2027, allowing companies 10 years to fully develop the offshore tracts they lease.
(Reporting by Tom Doggett; Editing by Gary Hill)
( Original Article )
Norway: Halliburton Receives Integrated Well Services Contract from Statoil
Halliburton has been awarded a contract by Statoil to provide integrated drilling and well services offshore Norway with options up to eight years in duration with extended scope and activity.
Traditionally, Statoil has procured drilling and well services on a discrete basis. This is the first time Statoil has awarded an integrated well services contract in Norway, which includes project management by Halliburton, with the intent to increase efficiency and reduce development costs.
Under the first phase of the contract, Halliburton will provide directional drilling and logging-while-drilling services, surface data logging, drill bits, hole enlargement and coring services, cementing and pumping services, drilling and completion fluids, completion services – including multilateral junctions, SmartWell(R) completion systems and VersaFlex(R) expandable liner hangers – and project management.
The contract is part of Statoil’s Fast Track Field Development Initiative that has been launched to minimize the time from discovery to production and reduce development costs. In the Fast Track project, the service company and operator work more closely together as an integrated team. This results in better operational efficiency on the rigs, which, in turn, results in lower overall project costs for the operator. This allows the operator to develop marginal oil discoveries that would have been deemed uneconomical using traditional contracting models. For this contract, Halliburton’s onshore operations team will integrate with Statoil’s team in Stavanger, Norway.
“We are delighted with this contract, and we look forward to collaborating with Statoil to accelerate the field development and impact the production on the Norwegian Continental Shelf,” said Jorunn Saetre, Halliburton’s area vice president for Scandinavia.
ABOUT HALLIBURTON
Founded in 1919, Halliburton is one of the world’s largest providers of products and services to the energy industry. With nearly 60,000 employees in approximately 80 countries, the company serves the upstream oil and gas industry throughout the lifecycle of the reservoir – from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field.
( Original Article )
Petrobras in Talks With China Development Bank
After the BRICS Interbank Cooperation Mechanism Annual Meeting and Financial Forum, Petrobras’ CEO, José Sergio Gabrielli de Azevedo, its CFO and Investor Relations Director, Almir Barbassa, and company executives were welcomed today (April 13) by the chairman of the China Development Bank, Chen Yuan, and his top aides.
During the meeting, they discussed mechanisms for cooperation between the Chinese bank and the Brazilian company.
The chairman of the CDB opened the meeting stating that the bank has loaned upwards of $14 billion to Brazilian companies, $10 billion of which to Petrobras, and stressed that the projects are being very well implemented. Chen Yuan highlighted the importance of the Brazil-China partnership and the need for transparency in the negotiations for further integration.
Petrobras’ CEO spoke of the strategic relations between the governments of Brazil and China, the importance of the credit that has been extended to the company, and the opportunities that are opening up in Brazil.
( Original Article )
Domestic oil production could solve energy woes
Published 12:02 a.m., Thursday, April 14, 2011
The sudden spike in oil prices set off by political instability half a world away is causing energy costs to surge to record levels in America. With gas hovering around $3.50 on average, Texas families are spending $40, $50, $60 or more to fill up their cars and trucks.
As a possible “solution” to soaring gas prices, the administration is considering tapping into the Strategic Petroleum Reserve (SPR), our nation’s emergency source of oil. This has only been done twice before, once during Operation Desert Storm in 1991 and another time after Hurricane Katrina in 2005.
Those were true emergency situations. Consequently, I believe it would be misguided to authorize emergency sales from the SPR when there are ways available to decrease costs to consumers by increasing domestic energy production. Depleting our reserves would make our economy more vulnerable if a natural or man-made disaster occurs.
Instead, we should be expanding and expediting domestic oil production to help increase the supply of fuel and lower prices for consumers. Fully leveraging our vast domestic resources would prevent us from being beholden to foreign regimes for energy when there is instability in oil producing regions of the world.
The Gulf of Mexico accounts for 30 percent of total U.S. oil production and 13 percent of total U.S. natural gas production. Unfortunately, bureaucratic barriers have prevented oil and gas producers, and thousands of American workers, from getting back to work in the aftermath of the BP oil spill.
In the wake of the BP accident, energy production virtually shut down in the Gulf of Mexico and moratoria were placed on drilling. The shallow water moratorium was “officially” lifted on May 28, 2010, but since then, only 37 new shallow water permits have been issued. Prior to the Gulf Coast oil spill, the shallow water permit approval average was 10 to 15 permits per month.
Energy producers operating in the deep waters off our coasts have faced similar challenges. The industry is working to ensure that the most stringent environmental and safety standards are always followed, and the administration lifted the moratorium on deepwater drilling last October.
But more bureaucratic delays and confusing regulations have left deepwater rigs sitting idle. In fact, only one new deepwater permit has been approved in a year. This “permitorium” is placing our natural resources out of reach when we need them most. What’s worse, they are sending American jobs overseas as energy producers move their operations elsewhere.
Gas exploration activities have also been impacted. The Department of Interior (DOI) ordered drilling lease holders in the Gulf of Mexico to halt all exploration drilling operations after the BP accident. At the time, 33 leaseholders were conducting exploration drilling, while thousands of leaseholders were in the earlier stages of exploration.
While the moratoria were in place all of the leaseholders continued to pay “rent” as time ticked away on the length of each lease. To address this issue, I recently introduced the Lease Extension and Secure Energy (LEASE) Act of 2011 which will grant a one year extension on all exploration leases in the Gulf impacted by the DOI’s drilling moratoria.
The LEASE Act provides a fair and reasonable restoration of the time lost. Allowing leaseholders to use the full length of their lease provides them with the certainty needed to plan for the future, including investing in the local workforce and protecting American jobs.
The offshore industry’s domestic energy production is not only vital to our energy independence — it is also vital to our economic security. More than 400,000 jobs along the Gulf of Mexico are tied to the oil and gas industry, in 2009 accounting for $70 billion in economic value and providing roughly $20 billion in revenue to federal, state and local governments.
Keeping energy prices low and stable are critical for economic recovery and growth. We must not allow the instability of foreign governments and the inaction of our own to place our energy and economic security at risk.
Kay Bailey Hutchison is the senior U.S. senator from Texas.
( Original Article )
Continents of the World
Mb50's "Liquid Mud" Rant 